The rising cost of U.S. health care has reduced the share of compensation that is taxable by Social Security. Between 1960 and 2010, non-taxable employer premiums for worker health plans increased from 1 percent of employee compensation to 7 percent. We use international data to examine the determinants of trends in health care spending and the reasons that the U.S. experience has differed from that of other high-income countries. In 2010, the share of U.S. gross domestic product devoted to health care was 7.2 percentage points higher than the share in other rich countries. We document the growth of this gap in the past five decades. Much of it developed between 1980 and the mid-1990s, though we also find another episode of outsized growth in the early 2000s. We identify six countries, including most of Scandinavia, which have seen a slowdown in health spending growth. These were also countries that had higher-than expected health spending, given their average incomes, in the 1960s and 1970s. The slowdown in health expenditure growth may simply reflect a reversion of their spending toward the OECD mean. We find no mean reversion in U.S. health spending growth. Our review of other literature suggests that the current excess in U.S. health costs is mainly traceable to higher prices for health care goods and services. Compared with other OECD countries, the United States has been slow to develop institutions or global budget constraints that restrain the pace of growth in health costs.

Framing Social Security Reform: Behavioral Responses to Changes in the Full Retirement Age

Luc Behaghel and David M. Blau

We use a US Social Security reform as a quasi-experiment to provide evidence on framing effects in retirement behavior. The reform increased the full retirement age (FRA) from 65 to 66 in two-month increments per year of birth. We find strong evidence that the spike in the benefit claiming hazard at 65 moved in lockstep along with the FRA. Results on self-reported retirement and exit from employment go in the same direction. The responsiveness to the new FRA is stronger for people with higher cognitive skills. We interpret the findings as evidence of reference dependence with loss aversion. (JEL D91, H55, J14, J26)

Social Security has largely been absent from the campaign, and President Obama even went so far as to say that he and Gov. Romney have very similar positions on how to fix the program. (I actually don’t agree that they do, but the point is that Obama said it.)

The question is why? The conspiratorial mind of Dean Baker has an answer:

“But there is another set of economic considerations affecting the politics of social security. These considerations involve the economics of the political campaigns and the candidates running for office. The story here is a simple one: while social security may enjoy overwhelming support across the political spectrum, it does not poll nearly as well among the wealthy people – who finance political campaigns and own major news outlets. The predominant philosophy among this group is that a dollar in a workers' pocket is a dollar that could be in a rich person's pocket – and these people see social security putting lots of dollars in the pockets of people who are not rich.”

Could this be true? Sure. But given that the rest of Obama’s campaign has consisted largely of bashing the rich for failing to pay their fair share, I personally doubt it.

Wednesday, October 24, 2012

U.S. News & World Report reports that SSA may further reduce hours in its field offices in response to budget cuts.

“Beginning November 19, 2012, we will close Social Security field offices to the public 30 minutes early each day," [an SSA spokesman] wrote. "For example, a field office that is usually open to the public Monday through Friday from 9:00 am to 3:30 pm will close daily at 3:00 pm; and beginning January 2, 2013, we will close Social Security field offices to the public at 12:00 pm on Wednesdays." Staffers will not lose normal hours, but will be much less likely to require overtime to finish helping members of the public who arrive at the offices late in the day.”

In addition, SSA will once again suspend mailings of the annual Social Security Statement, although the Statement will continue to be available online.

Monday, October 22, 2012

The National Bureau of Economic Research has released a new paper by John Shoven of Stanford and my AEI colleague Sita Slavov titled “When Does It Pay to Delay Social Security? The Impact of Mortality, Interest Rates, and Program Rules.”

Here’s the summary:

“Social Security benefits may be commenced at any time between ages 62 and 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit to reflect the age at which benefits are claimed. In earlier work (Shoven and Slavov, 2012), we investigated the actuarial fairness of this adjustment for individuals with average life expectancy for their cohort. We found that for current real interest rates, delaying is actuarially advantageous for a large subset of people, particularly for primary earners in married couples. In this paper, we quantify the degree of actuarial advantage or disadvantage for individuals whose mortality differs from the average. We find that at real interest rates close to zero, most households – even those with mortality rates that are twice the average – benefit from some delay, at least for the primary earner. At real interest rates closer to their historical average, however, singles with mortality that is substantially greater than average do not benefit from delay; however, primary earners with high mortality can still improve the present value of the household’s benefits through delay. We also investigate the extent to which the actuarial advantage of delay has grown since the early 1960s, when the choice of when to claim first became available, and we decompose this growth into three effects: (1) the effect of changes in Social Security's rules, (2) the effect of changes in the real interest rate, and (3) the effect of changes in life expectancy.”

Some questions: Do people react to this change in incentives? If so, do they simply delay claiming benefits or do they both delay claiming AND remain in the workforce? If the latter, would increased payroll tax revenues compensate Social Security for offering delayed retirement benefit adjustments that are more than actuarially fair?

Friday, October 19, 2012

The Washington Post’s Ezra Klein writes that the AARP has drawn the line on payroll tax cuts, which have been extended in an attempt to boost the economy but which, in the view of AARP and others across the spectrum, threaten to undermine Social Security as a self-financing program generating “earned benefits” for participants.

Klein writes:

“When Congress agreed to extend payroll taxes by another year in 2011, it did so by replacing the lost funds with general revenue for the first time in history. That addressed some policymakers’ concerns about the Social Security Trust Fund’s insolvency. But it was a worrisome step for the AARP and other Social Security advocates, who believed it undermined the entitlement program’s protected status, lumping it in with a general budget that could be subject to future cuts and trade-offs. ”Social Security is a separate, off-budget program, with a dedicated funding source—messing with the formula shouldn’t even be a part of the budget debate,” Certner added. “The promise of this was that it would be temporary. Going beyond two years—you’re going way beyond temporary country.’”

Writing for Reuters, Mark Miller runs through a SSA Office of the Actuary analysis of rates of return paid to different types of people from Social Security. You can check out the SSA study directly here.

Miller states “[The SSA analysis] showed that some workers might beat Social Security's returns in some years if they took risks in the stock market. But over a lifetime, Social Security's consistent, risk-free and inflation-adjusted returns would be very tough to beat.”

I’m not so sure.

One mistake Miller makes is to look at “current law” benefits, which assumes that Social Security can pay full benefits forever without raising taxes. In other words, it overlooks the multi-trillion dollar funding shortfalls that are the main reason we think about Social Security reform.

A more accurate analysis, and one that is truly reflective of current law, assumes that full benefits will be paid through the early 2030s, when the trust fund is projected to run out. Following that, benefits are reduced to the level that can be paid through payroll tax receipts alone, a cut of around one-fifth. That obviously would reduce returns from Social Security.

While there are other (and better) ways to fix Social Security’s finances, no matter how we do it, rates of return paid by Social Security will on average be consistent with this “payable benefits scenario.” We might raise taxes rather than cut benefits, or we might cut benefits gradually rather than all at once, or we might cut benefits for some but not for others, but the net effect on rates of return will on average be the same.

And under this realistic baseline rates of return aren’t exactly staggering. For instance, a typical couple retiring today would receive a return of less than 3.2 percent, which is about what you’d get on government bonds. But considering the political risk of Social Security, my guess is people would consider government bonds to be a better deal. Going forward returns will be lower. And for single individuals or higher-earning couples, returns can be well below the government bond rate.

Is Social Security a terrible deal? For a low-risk investment, no. But is it a good deal? Not really.

Wednesday, October 17, 2012

Over at Real Clear Markets, my AEI colleague Sita Slavov writes on how Social Security treats married women who choose to work:

“We've heard a great deal about the "war on women" lately, mostly in connection with hot-button issues like abortion and birth control. But beyond all this rhetoric, there is in fact a large program whose design reflects antiquated, sexist thinking about women. It's called Social Security.”

“Social Security's spousal and survivor benefit provisions - which date back to 1939 - make the program a terrific deal for spouses who stay out of the labor force. As such, they are unfair to the growing number of two-earner families, and they discourage married women from working outside the home. We will soon need to undertake serious reforms to keep Social Security solvent. Redesigning the program to reflect the changing role of women could be a rare opportunity for bipartisan agreement.”

Asked about Medicare reform, the vice president said, "Look, I was there when we did that with Social Security in 1983. I was one of eight people sitting in the room that included Tip O'Neill negotiating with President Reagan. We all got together and everybody said, as long as everybody's in the deal, everybody's in the deal, and everybody is making some sacrifice, we can find a way."

So did Biden exaggerate his role in the 1983 reforms? If you can’t already guess the answer to that question, read the full story to find out…

Writing for the Mercatus Center at George Mason University, Social Security Trustee Chuck Blahous raises concerns that Social Security’s self-funding status – which has help maintain both political support and budget discipline over the years – is at risk.

KEY POINTS

FDR designed Social Security as a self-financed program to distinguish it from welfare, to impose fiscal discipline within the program, and to ensure all working people had a sense of having earned their benefits—all of which worked together to protect benefits from political pressure and budgetary competition.

Since its inception, Social Security has enjoyed a unique level of political support because it was structured on the self-financing principle. With relatively minor exceptions, there remained a strong bipartisan consensus through the mid 1990s to preserve this structure.

Over the past several years, commitment to this practice has progressively weakened as lawmakers have become less willing to tax workers, particularly lower-income workers, at the level required to finance rising benefit costs.

While several policies had already been enacted to shift Social Security financing burdens tacitly from individual payroll tax payers to the general government fund, the self-financing link remained formally intact until the payroll tax cut was enacted in 2010 and made effective for 2011–12.

In 2010, President Obama and Congress formally severed the Social Security program’s contribution-benefit link with the enactment of the payroll tax cut, which included a provision to tap general revenues to subsidize Social Security benefit payments.

If Social Security’s contribution-benefit link continues to deteriorate, it could transform public perceptions of the program into something more akin to welfare.

Monday, October 15, 2012

In a typical presidential campaign, Social Security would have by now reared its head, either though a candidate’s thoughtful presentations of reform proposals or, more often, accusations that the opposing candidate’s plans would doom the program and the millions of retirees who depend upon it. Al Gore promoted the famed “lock box” while George W. Bush discussed his ideas for personal retirement accounts.

In 2012, however, Social Security has been conspicuous by its absence. Yet the issue remains as important as ever. Social Security is today running deficits, and the system’s Trustees project that the trust fund – meaningful or not – will be depleted by around 2034. When this happens, by law benefits whole be cut across the board by around one-fifth. Social Security’s 75-year deficit totals roughly $8.6 trillion, and for each year we delay addressing it the shortfall only grows larger.

So where do President Obama and Gov. Mitt Romney stand on Social Security. At first glance, you’d think their positions were the same – at least if you took President Obama’s word for it. In the first debate with Romney, Obama said, “I suspect that on Social Security, we've got a somewhat similar position.” These were about the last words I’d expected to hear from the President, if only because beating the GOP over Social Security is on page 1 of the Democratic political playbook.

Obama himself has put forward nothing on Social Security since his 2008 campaign, in which he called for a surtax of 2 to 4 percent on earnings over $250,000. As I argued at the time, this plan would fix only around half the Social Security deficit. More recently, Vice President Biden told Virginia voters “I guarantee you, flat guarantee you, there will be no changes in Social Security. I flat guarantee you.” Assuming Biden let the President know of their new position, this doesn’t leave Obama many options beside more tax increases.

Romney, however, has proposed a different approach. Romney’s campaign website puts forward two principles for Social Security reform:

First, for future generations of seniors, Mitt believes that the retirement age should be slowly increased to account for increases in longevity.

Second, for future generations of seniors, Mitt believes that benefits should continue to grow but that the growth rate should be lower for those with higher incomes.

Together, these would address most of Social Security’s long-term deficit.

The question is where Obama’s views truly lie. His 2008 proposal has lain dormant for four years and Biden’s statements are almost surely the extemporaneous statements of what Clint Eastwood termed “the grin with a body behind it.” If Obama, whose campaign is surely aware of Romney's positions on Social Security, is willing to adopt a similar approach then there may be hope for a post-election resolution regardless of who wins the election. But with the race so tight, the temptation to fall back on old demagoguery may be difficult to resist.

JANUARY 2013: A new Congress… possibly a new President. Much will have changed — but the nation will still be struggling to recover fully from the Great Recession, and policymakers will still be under enormous pressure to rebalance the federal budget. Some will advocate major changes to the nation’s great social insurance programs. The one certainty is that doing nothing will not be a viable option. How changes will impact Medicare, Social Security, and the vast numbers of Americans served by these vital programs remains to be seen.

Since its founding in 1986, the National Academy of Social Insurance has become the nation’s leading nonpartisan, nonprofit organization dedicated to advancing public understanding of Social Security, Medicare, and other social insurance programs. NASI’s 2013 conference takes place at a critical moment when serious policy discussions will require an infusion of fresh and provocative proposals for constructive change. Count on it: they’ll be heard at NASI’s 25thannual conference.

Join your colleagues for a two-day program featuring seven plenary sessions, including four keynotes -- featuring speakers like David Wessel (economics editor for the Wall Street Journal and author of Red Ink: Inside the High Stakes Politics of the Federal Budget), who will give the luncheon keynote on Day 1.

New at the 2013 conference: You will choose from three breakout sessions on either Medicare or Social Security (across Thursday and Friday afternoon), plus choose from at least five roundtable sessions (on Friday morning) that will cover a range of salient topics in social insurance. Outstanding speakers and leading experts from many fields will address key questions, such as whether Social Security and Medicare need only a tune-up or major changes – and how social insurance can better meet the needs of all Americans in the years ahead.

Register online or complete the registration form (attached). Detailed program and more speakers will be announced in the coming weeks. Please check the 2013 NASI Conference page for updates.

Federal “Fire Sale”: Are you a federal employee? Make the most out of your budget by taking advantage of a special group rate. For groups of four or more, you and your colleagues can attend the conference at the deeply discounted rate of $450/attendee ($250 less than the non-member early bird rate, and $50 off the NASI member early bird rate). Registrations must be received by Monday, Oct. 1, 2012. To register, please use the Federal Fire Sale registration form (attached). Online registration is not available for this rate. Further instructions can be found in the form.

There is a strong consensus that social pensions can potentially play a significant role in reducing old-age poverty in Asian countries. This chapter examines the determinants of the short- and long-term fiscal costs of social pensions in Asia, and avenues for enhancing fiscal space for financing these pensions. The analysis suggests that in the short and medium term (3-5 years), additional fiscal space equivalent to 1%-1.5% of gross domestic product (GDP) will be needed, and 2%-2.5% in the longer run. The long-run fiscal costs of social pensions will be influenced by factors such as demographic trends, behavioral responses, political economy, and public aspirations and expectations. The extent of the needed fiscal space can, however, be moderated by better design, implementation, and governance of social pensions, and their coordination with the rest of the pension system. To enhance fiscal space, generating the requisite reallocation of budgetary expenditure and improving its outcome orientation, as well as obtaining additional revenue from conventional and nonconventional sources, are needed. The chapter suggests that those Asian countries that find an appropriate balance between development and the fiduciary perspective of fiscal space are more likely to be successful in using social pensions as an important instrument for reducing old-age poverty.

The central question of this paper is how international trade and specialization are affected by different designs of pension schemes and asymmetric demographic changes. In a model with two goods, two countries and two production factors, we find that countries with a relatively large unfunded pension scheme will specialize in the production of labour intensive goods. If these countries are hit by a negative demographic shock, this specialization will intensify in the long run, which is contrary to the prediction of the classical Heckscher-Ohlin-Samuelson model. Eventually, these countries may even completely specialize in the production of those goods. The effects spill over to other countries, which will move away from complete specialization in capital intensive goods as the relative size of their labour intensive goods sector will also increase.

Decisionmaking hubris with cognitive origins is present today in many labor and employment law cases in the United States. In two previous law review articles, I explored whether anthropological and psychological explanations of judicial decisionmaking could provide meaningful insights into how U.S. Supreme Court Justices decided some of the more controversial labor and employment law decisions. Indeed, motivated cognition of the cultural variety, or “cultural cognition,” did robustly explain how Justices’ values in two different labor and employment law cases led to different perceptions of legally-consequential facts in those cases. Culturally-motivated cognition is “the ubiquitous tendency of people to form perceptions, and to process factual information generally, in a manner congenial to their values and desires.” The resulting opinions by the Justices in these cases suffered from “cognitive illiberalism,” which too readily discounted the views of dissenters in favor of the majority’s views of the case. Thus, in these same works, I considered potential social science and legal debiasing techniques for ridding these decisions of delegitimizing bias, while simultaneously making them more acceptable to a larger segment of society. This article proposes to investigate how these opinion-writing and institutional debiasing strategies could work in practice in the particularly arcane and maddeningly complex area of employee benefits law under the Employee Retirement Income Security Act of 1974 (ERISA). The hope is that the professionalization of the judicial corps through the establishment of ERISA courts based on the bankruptcy court model might promote opinion-writing debiasing techniques that reduce the amount of cognitive illiberalism in employee benefits law opinions. Although no system of judicial decisionmaking will be completely free of the effects of cultural cognition, such debiasing strategies hold out the promise that employee benefit decisions will be more likely based on widely accepted perceptions of fact and evaluation of legal arguments, rather than based on the subconscious cultural biases of the sitting judge.

Whichever political party prevails in November 2012, it is likely that the next Congress will, of necessity, address issues of the federal deficit, entitlements, and tax policy -- specifically, proposals to modify or reduce existing tax preferences for health and retirement benefits. In that context, EBRI’s 70th policy forum focused on a range of topics, from tax policy and design incentives, to international trends and current drawdown rates, and how they might influence, and be impacted by, future events. This paper recaps the presentations and panel discussions at that event. Among the key points made at the policy forum: As important as retirement and health benefits are to Americans’ short- and long-term economic security, the sheer size of their tax preferences makes them vulnerable in the battles over deficit reduction and tax reform. Private-sector health benefits alone rank as the largest single “tax expenditure” in the federal budget. Retirement benefits are a tax deferral rather than an exclusion from income -- meaning the federal government will eventually recoup the forgone revenue. This distinguishes retirement plan deferrals from other tax exclusions. Because the tax expenditure on 401(k)-type plans is a deferral, rather than an exclusion, reducing the tax expenditure in the current period also reduces the positive stream of revenue in the future. The biggest difference between tax-expenditure estimates and revenue estimates for scoring tax reform is that the latter incorporates taxpayer behavior; tax expenditure estimates do not. Ten percent or fewer of those ages 55-60 are making withdrawals from their IRA, compared with 80 percent of those 71 and older. On a historical basis, depending on the period measured, pre-retiree balances in defined contribution retirement plans double about every eight to nine years. Employer match levels seemed to have a bigger impact on older workers, but automatic enrollment seems much more significant in terms of getting younger employees to participate in retirement plans. Common challenges for underfunded retirement systems worldwide include the need to increase the state pension age and/or “normal” retirement age for full benefits; to promote higher labor-force participation at older ages; to encourage or require higher levels of private saving; to increase retirement coverage of employees and/or the self-employed; and to reduce savings “leakage” prior to retirement.

This article is designed to provide an overview of the U.S. retirement income security system from a comparative law perspective. Like many countries, the U.S. has a three tier pension or retirement income system, with the three tiers consisting of (1) Social Security, (2) employment-based pensions, and (3) individual savings. Thus, superficially, the U.S. retirement income security system resembles that of many around the world. Yet, in other ways, such as its focus on individual rights and responsibility, the U.S. system is unique. The article begins by discussing the nine guiding principles of the U.S. Social Security system as identified by the late Robert Ball. It then describes the principal elements of employment-based pension plans in the U.S and provides a brief overview of individual savings. The article then turns to the values reflected in the U.S. retirement income security system. It discusses how the U.S. system does, and does not, reflect the European values of (1) responsibility, (2) protection, (3) solidarity, (4) nondiscrimination, and (5) participation.

The Associated Press reports that Social Security’s Cost of Living Adjustment for 2013 will likely be between 1 and 2 percent. While based on preliminary data, if true this would be one of the lowest figures since automatic COLAs began in the 1970s. Read more here.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.